North America

Earnings Preview: Wells Fargo Q4 2016 (WFC)

By: Craig Bowles

Overview

Wells Fargo & Company (WFC) is scheduled to report 4Q 2016 earnings before the opening bell on Friday, January 13th. The results are expected to come through at approximately 8:00 a.m. ET with a conference call webcast at Wells Fargo Investor Relations to follow at 11:30 a.m. Wells Fargo reports at a similar time as JP Morgan Chase (JPM) and after the Bank of America (BAC) release earlier the same morning. The large banks have the potential to impact the broader market indices, including the S&P Index Futures and corresponding ETFs.

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Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): The value for this measure typically compares with consensus estimates. The analyst consensus estimate is $1.00 (range $0.94 to $1.08). (Source: Yahoo! Finance) Consensus was $1.01 three months ago.
  • Revenues: Analyst consensus expectations are for a 4.1% y/y increase to $22.47 bln (range $22.05 bln to $23.18 bln).
  • Wells Fargo Price/Earnings of 13.7 compares to the 5-year average 12.1; Price/Book of 1.6 compares to the 5-year average 1.5; Price/Revenue of 3.2 compares to the 5-year average 2.8. Dividend Yield of 2.8% compares to a 5-year average of 2.5%.
  • Analysts view Wells Fargo with 13 (19 last qtr) Buy, 11 Hold, and 7 Sell ratings (source: MarketBeat.com).
  • Wells Fargo insiders sold zero shares over the last three months but 4,396,168 shares in the past year. (source: NASDAQ.com) In January 2016, Wells Fargo approved another 350 million share buyback following a similar 2014 approval.
  • Wells Fargo shares have a 1-day average price change on earnings of 1.27%. Options are pricing in an implied move of 3.05% off earnings.

Recent News

  • 01/04: Big U.S. banks are set on getting Congress this year to loosen or eliminate the Volcker rule against using depositors’ funds for speculative bets on the bank’s own account, according to a post by Reuters.com.
  • 01/03: Baird recommends investors “selectively reduce bank exposure” but still likes Wells Fargo, which they call a “top buy idea.” Headline risk from the retail sales infractions should fade over time. The value of their leading retail deposit franchise should be more apparent in a rising interest rate environment, according to a post on Barron’s.com.
  • 12/21: Moody’s believes the Fed’s new TLAC rule means Wells Fargo needs another $36.4 billion to buffer against any potential future losses in a crisis, according to a post on Barron’s.com.
  • 12/21: Wells Fargo’s fund business is eyeing the launch its first ETF, according to a post on Barron’s.com.
  • 12/19: Wells Fargo plans to eliminate broker bonuses tied to getting clients to take out mortgages, securities-backed loans and other lending products, according to a post on Barron’s.com.
  • 12/14: KBW says Wells Fargo’s failure to come up with an adequate plan to prevent having to be bailed out by taxpayers if it should face bankruptcy is another headache but a bigger concern is Brexit, according to a post on Barron’s.com.

Technical Review

Wells Fargo shares rallied 27% after the Trump election but shows relative weakness over the past year. Possibly money has continued to rotate back into JP Morgan Chase, since Q1 2015. Point and figure technicians have met their initial bearish price objective of $46 and have a bullish objective of $74. (Chart courtesy of StockCharts.com)

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Summary

Wells Fargo needs to set aside another $36.4 billion to satisfy a new Fed rule, according to Moody’s. The CEO resigned amid a culture problem where fraud had become company policy. Traders will be looking for another stock buyback announcement. The company has beaten earnings consensus by an average of 1c the last four quarters.  Estimize consensus for an EPS of $1.02 on revenue of $22.432 bln compares to analyst consensus of $1.00 on revenue of $22.47 bln.

 

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